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How finance and accounting can boost innovation

Five years ago, Jimmy Keeter, CPA, was concerned about what he saw after performing a worst-case scenario analysis on the trucking operations of Daylight Donut Flour Co. of Tulsa, Oklahoma, which he serves as CFO.

The company, which provides ingredients and equipment to licensed doughnut shop operators in 38 states and a few locations outside the United States, carried insurance, of course. But Keeter determined that a worst-case trucking catastrophe could exceed its coverage and bankrupt the company.

Keeter’s concern about liability led to a decision by CEO John Bond and the company management team in 2008 to outsource trucking operations that had been managed by Daylight Donut since 1977. The move to provide long-term sustainability is a simple example of the finance-driven innovation CPA decision-makers crave, according to a survey released Tuesday.

Nearly three-fourths (74%) of CPAs participating in the American Institute of CPAs Business and Industry Economic Outlook Survey for the third quarter of 2013 said finance and accounting should play an important or extremely important role in organisations’ innovation efforts.

But just 30% of respondents said finance and accounting contributes to innovation to a large or extremely large extent. Thirty-six per cent said finance and accounting makes modest contributions to innovation.

Nonetheless, the survey results show a desire from at least some CPAs for finance and accounting to have more of a role in innovation. Survey respondents viewed executive management and operations as the biggest functional contributors to innovation, ahead of finance and accounting.

Q: To what extent does each of these functions contribute to innovation at your organisation?

Source: AICPA Business and Industry Economic Outlook Survey, 3Q 2013.

A CGMA report released in May described the role finance can play in fostering a creative atmosphere at organisations. Stephen Bolton, FCMA, CGMA, group controller for UK-based alcoholic beverage producer Diageo, said in the report that finance professionals in his company are embedded in all stages of innovation initiatives.

“Their role is decision support in the innovation process, from idea right through to launch,” Bolton said.

Finance plays a multifaceted role in global oil and gas company Royal Dutch Shell’s innovation programme, CFO Simon Henry, FCMA, CGMA, said in the report. The finance function helps the business encourage innovation, but not in a totally uncontrolled way.

“A finance function needs to be able to understand the business well enough to know what is a worthwhile activity, but also, in this part of the business, to have a bit more of an open mind,” Henry said in the report.

That open-mindedness sometimes is elusive. Dennis Durkin, CPA, CFO of Philadelphia-based real estate multiple listing service provider TREND, said that unfortunately, finance sometimes is seen as an obstacle to innovation in organisations.

“Ideally, it would be most effective to have a partnership, an understanding between finance and accounting and the rest of the company,” Durkin said. “I think that’s what works best. But I think there are enough occasions where finance and accounting becomes the stumbling block [for innovation]. And it shouldn’t be. Its purpose is to serve the other departments.”

Technology can be a barrier

Durkin encourages innovation and would like finance to play a larger role in generating and promoting new ideas at his company. But he said the technology used in IT and product management at TREND is so complex that it limits his input.

He said he is fortunate to have personnel in those departments who can explain the technical aspects to him so that finance can help facilitate innovation. But he doesn’t have the technical knowledge to suggest new processes himself.

Durkin has been considering updating the technology used for finance and accounting processes themselves in hopes of creating more efficiency and better controls. But he said his staff is performing well and is comfortable with the way things are done now. And Durkin said it’s difficult to assess whether a new system would deliver increased efficiency.

Up until about ten years ago, Durkin said, accountants would identify needs and then buy technology to fill those needs. Now, he said, technologies are being developed before accountants even identify needs. And accountants find themselves puzzling over technologies to figure out whether they could fill needs or solve problems that the accountants may not have even been aware of.

“I need to understand them in order to have confidence in them, in order to be able to look somebody in the eye and say, ‘Yeah, this is what I think we should do,’ ” Durkin said. “As far as innovation goes, I personally would be more innovative with more understanding of the technologies that are available.”

Benjamin Harris, CPA, CGMA, president and CEO of communications and technology consulting firm BLH Technologies in Rockville, Maryland, said many accountants need more training to take full advantage of software and data analytics to find problems and inefficiencies that could be corrected.

More emphasis on data analytics at the college level and training for working CPAs by organisations and industry groups could help bridge a knowledge gap that is hindering innovation by finance and accounting, Harris said.

In addition, he said some accountants are too busy getting their reporting done to set aside time to analyse problems and find efficiencies.

“Being innovative requires time set aside strategically to understand what the problems are and then applying different, innovative ways to doing it,” Harris said. “I think they just need to set aside time … and get the buy-in from top management that will allow them to spend the time on the proactive work versus just getting the work done.”

Organisations often lack what might be called “drivers” for innovation, according to the survey.

The most commonly cited driver was an “innovative culture,” which 31% of respondents said exists at their organisations. Other drivers were rarely present in respondents’ companies:

17% have financial incentives for employees who innovate successfully.

13% have a clearly defined risk appetite that sets the parameters for innovation.

10% use “stage-gate” processes that help early-stage innovations while limiting risk.

5% participate in “crowd sourcing” through software or social media.

Forty-one per cent of organisations reported using none of those tactics to drive innovation.

Although formal organisational support for innovation may be lacking, some experts say this presents an opportunity for finance and accounting to take the lead. Chris Bragas, CPA, CGMA, president and CEO of New York-based Eastwest Marketing Group, said the finance function’s work with data on the back end of processes creates the ability to recognise opportunities to improve the processes.

The key, Bragas said, is partnering with colleagues in other business units.

“They’re seeing the end result [in finance and accounting], and then they can go backward with it,” said Bragas, whose agency helps consumer packaged goods companies market their products. “… But it’s also having the guts to say, ‘From an operational perspective, this is what I see, folks. Let’s chat and make it work.’ ”

Hurdles and tips

The top impediments to innovation at organisations include regulatory hurdles (41%), lack of budgetary resources (34%) and organisational aversion to risk (30%), according to the survey.

Q: Which of the following factors are significant impediments to innovation at your organisation? Please check all that apply.

Source: AICPA Business and Industry Economic Outlook Survey, 3Q 2013.

Despite the hurdles and shortcomings, one expert sees the survey results as an encouraging sign.

The fact that nearly three-fourths of survey respondents consider finance and accounting to have an important role in innovation represents a positive shift, according to Joshua Azran, CPA/ABV/CFF, CGMA. A management consultant and partner/owner of CPA firm Azran Financial in California, Azran said that the results show a change in attitude from about ten years ago, when, he said, some CPAs thought it was enough to implement an SAP or Oracle system to create reports and organisational dashboards for executives.

“I think after a couple years they realised it’s not that easy,” Azran said. “It’s not just about throwing the information out there. It’s about working with it. It’s about driving innovation from it, and it’s about improving technology functions and processes so finance and accounting become a true driver of value.”

Azran said organisational agility is helping innovation by finance and accounting occur more rapidly at mid-size companies than at large corporations. His tips to help finance and accounting become more innovative include:

Be part of fostering a culture of innovation. “The best companies I’ve seen, of all sizes, really … include finance and accounting at the table, not just at the board meetings, but at the meetings when you’re trying to figure out how to do better for the company as a whole,” Azran said.

Leverage existing technology. “There are a ton of applications, plug-ins, technology resources, ways to leverage things, ways to reorganise your organisation, and really become a sum of the parts,” Azran said.

Don’t be afraid of technology. Azran said people fear technology because they think it’s going to replace their jobs, but he said he hasn’t seen that to be the case. “It definitely re-tasks people, and I won’t mince words about that. But in most all circumstances, [technology handles some tasks], and then those [finance] people go and add value or support in other ways,” Azran said.

Become an expert in a subject outside finance and accounting. “There’s not a hard-and-fast line between finance and accounting and IT, or finance and accounting and sales, or anything. And those people who I think realign themselves and identify those opportunities are going to bring significant value to their companies,” Azran said.

Take time to analyse the data and think innovatively. Azran said companies need to give finance and accounting professionals time to innovate outside of normal reporting, compliance and budgeting activities. “We have to start pushing data. There has to be buy-in about that, absolutely, giving people the time to do the analysis, and … giving companies the opportunity to take advantage of that information,” Azran said.

Re-examine processes when installing new systems. “You’re not going to see the full value unless you go in with the perspective that we have to re-examine our processes and re-evaluate. It’s something a healthy company should do anyway on a regular basis,” Azran said.

At Daylight Donut, Keeter took a holistic look at the trucking operations and became convinced that a change needed to be made. He said the company previously did a good job – but not a great job – running its trucking services.

The trucking company Daylight Donut chose provided good service at a slightly higher price. But Keeter said the extra cost was worthwhile because it eliminated a huge liability and allowed Daylight Donut to focus more on its core operations.

A second five-year contract with the trucking company, which began September 1st, is evidence that the finance-driven innovation was a success.

“We’re a fairly small company,” Keeter said. “I would imagine that the role that I play in the direction our company goes is different from a lot of the roles [at larger companies]. I see how it works in a company of our size and could definitely see that with more involvement from finance in a larger company, they could probably drive better decisions, long term.”

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